Nifty and Defty charts: a mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty has broken out above the symmetrical triangle pattern – thanks to relentless buying by FIIs. Of late, the DIIs have joined the bull bandwagon. The index has formed a bullish pattern of higher tops and higher bottoms since touching its Jun ‘12 low.

Both the 20 day and the 50 day EMA have moved above the 200 day EMA. Technically, Nifty is back in bull territory. Volumes have been rising for the past few days. Technical indicators are also looking bullish. So, is the bear market finally over?

For the bulls to regain control, Nifty has to cross convincingly above its Feb ‘12 top of 5630 – which is almost 300 points (more than 5%) higher than today’s closing level of 5338. That may not appear to be too difficult a task, but first the index has to overcome some rough terrain.

Today’s trading bar shows a close very near the lowest level of the day (5331). Combined with the high volume, it becomes a ‘distribution day’ that may end the rally. All four technical indicators are showing negative divergences – MACD and RSI have touched lower tops while ROC and slow stochastic have touched their previous tops.

A likely pullback to the top edge of the triangle, if followed by an upward bounce, will be a buying opportunity. But a pullback inside the triangle may prolong the sideways consolidation.

Defty chart

Despite heavy buying by FIIs, Defty’s one year bar chart pattern still looks bearish. The index just about managed to reach its Jul 4 ‘12 top of 3391, but is still trading below its falling 200 day EMA. The 50 day EMA is well below the 200 day EMA – a sign of a bear market.

All four technical indicators are showing negative divergences by reaching lower tops. Today’s high volume ‘distribution day’ bar may end the rally. A convincing break out above the 200 day EMA will be the first real bullish sign. A move above the Feb ‘12 top of 3967 will put the bulls back on top.

Fundamentally, things are not getting better. In fact, they may be getting worse. GDP growth is slowing down. Drought-like conditions in many parts of the country will fuel food price inflation, and force the RBI’s hand in keeping the high interest rates intact. Oil price is going up and exports are going down – worsening the balance of payments situation. Positive statements from the Finance Minister hasn’t translated into any policy action as yet.

So, why are the indices moving up? Because the economic situation is expected to get better after 6 months, and stock markets tend to ‘discount’ positive news in advance. Will the economic situation in India – and globally – get better in the next 6 months? Some one can get seriously rich if she knows the answer to that question!